Adoption of ESG Voluntary Standards By Fund Managers to Overcome U.S. Regulatory Shortcomings and Bolster ESG Defensibility (Part Two of Two)

Environmental, social and governance (ESG) investing attempts to highlight issues that may not have previously been considered “material” by the SEC or under corporate standards for profitability. In addition, the ESG construct offers greater latitude for corporate initiatives that seek to serve constituents beyond the traditional ownership stakeholders. Regulators have noticed, however, as evinced by a recent announcement that the SEC’s Division of Examinations will focus on reviewing ESG investing with “particular interest.” Investors – particularly, institutional investors – do not want GPs to use the SEC’s attention on ESG investing as an excuse to deviate from the original, ESG-friendly mandates of their funds and are taking steps to that end. If a fund’s investment mandate becomes inconsistent with agreed-upon ESG tenets, then LPs may, for example, elect to remove a poor-performing GP, to withhold committed capital or to move to end the fund’s term early. In a two-part guest series, Andrew King, partner at ESG Ventures, analyzes the status of mandatory and voluntary ESG oversight measures in the U.S. private funds industry to date. This second article describes the critical role of third-party ESG frameworks, advises fund managers on how to use them and cautions against risks associated with ESG investing. The first article reviewed the U.S.’ existing ESG regulatory regime and forecasted potential changes under the Biden administration. See “Preparing for the E.U.’s New Regulations for Disclosing Sustainability Risks and Negative Impacts From ESG Investing” (Jun. 9, 2020).

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